The introduction of the common European currency — the euro — on the 1st of January 1999 was an important step by the European community. Well before that, in 1990 the European Commission (European Commission (1990)) discussed the benefits of the euro introduction. Among other benefits it was argued that the introduction of the euro may cause a decrease in the risk premium on capital, which could lead to more investment due to the increase in positive net present value projects and hence to a higher growth level of the economy. In the present paper we study the companies’ security issue choices to detect the probable decrease in cost of capital due to the introduction of the common currency.

The elimination of exchange rate risk between the countries in the European Monetary Union (EMU) is a key factor spurring the integration of the twelve national financial markets. A larger pool of euro-denominated funds (increased competition between providers of capital), wider risk sharing and better diversification opportunities for capital allocation became available. A report by Baele, Ferrando, Hördahl, Krylova, and Monnet (2004) from the European Central Bank confirms that the home-country bias of European institutional investor portfolios has decreased substantially in the last few years after the introduction of the euro. At the same time the continent-wide diversification of portfolios caused the higher co-movement of stock returns. The study above reports evidence that the explanatory power of common economic news in European stock return variance has increased from 20% to 40% in the post-Euro period. By contrast, the integration of the European bank credit markets has been slow according to Baele, Ferrando, Hördahl, Krylova, and Monnet (2004). Rajan and Zingales (2003) show that the bond issues to GDP have increased within EMU countries compared to others after the introduction of the common currency. Hence, we observe the deepening of the financial markets.